Investors have placed their trust in technology over the past two years and have mostly benefited from it. Value stocks have fallen behind since then. Vanguard’s large-cap growth ETF VOOG returned 35% and 28% last year and 19% in 2023, respectively, while its S&P 500 large-cap value ETF VOOV returned 9.8% last year.
Bill Nygren, co-manager of the value-focused Oakmark Fund OAKMX and chief investment officer at parent Harris Associates, told clients earlier this month that “one of the nice things for a value investor today is because the S&P has been so concentrated in large-cap technology companies, the cheap stocks are spread out across most of the other industries.”
According to the fund’s recently announced fourth-quarter highlights, Nygren and his team highlight a few underappreciated equities that they have been purchasing in our call of the day.
First up is the online marketplace Airbnb (ABNB), whose stock has reportedly been negatively impacted by short-term concerns about travel and the economy. There is a “long growth runway as global travel is an attractive market, and alternative accommodations have been taking market share,” according to them. They anticipate that Airbnb will continue to grow by providing “valuable services” to both segments of its market.
The second is Carlyle Group (CG), an alternative investment firm. According to Oakmark, management is “taking the right steps to continue expanding the firm’s platform beyond its private equity roots,” which might help organic growth, even though the company is now trading at less than half the price/earnings multiple of its peer group. Additionally, its distribution capabilities and brand position it favorably in the retail channel, where alternative allocations need to increase.
Elevance Health (ELV) is the next stop. “Managed care stocks have underperformed the market recently as the industry faces headwinds from mismatches between reimbursement rates and medical costs,” according to Nygren and colleagues. However, they view those challenges as “transitory,” and adjustments to plan designs and pricing will eventually assist realign earnings trends.” Although it might take several years for “normal” profitability to emerge, they observe that shares are currently trading at a “depressed multiple of depressed earnings.”
They also claim that GE HealthCare Technologies (GEHC) is “well-positioned to capitalize on technology trends as a greater portion of the value proposition comes from AI-enabled software and a shift toward precision care.” They claim that concerns about weak demand in China and the markets’ inability to recognize the global health technology group’s “self-help potential” have caused valuation to decline.
They also draw attention to Keurig Dr Pepper (KDP), a beverage company whose stock suffered last year due to issues with its coffee division. They consider that move to be restricted because coffee is “poised to capitalize on this demand with the largest installed base of single-serve brewers and ample runway to increase household penetration.” This is in light of coffee’s continuous popularity. According to Oakmark, the market is currently providing that “minimal value.”
Wells Fargo (WFC), “a competitively advantaged bank, with a superior business mix,” Salesforce (CRM), and General Motors (GM) were the fund’s top performances during the quarter.
The managed healthcare organization Centene (CNC), which has been plagued by concerns about legislative changes from the new government of President-elect Donald Trump, is one underperformer they aren’t giving up on. They argue that this is excessive because Centene has “significant embedded earnings power that can drive continued EPS growth even with a less accommodative political backdrop.”
